Building Bigger Bundles

The US multiplay market is heating. We can point to AT&T's acquisition of DirecTV in 2015 and its planned bid for Time Warner, and Verizon's acquisitions of AOL and Yahoo to expand its advertising business (see Curb Your Enthusiasm). As options for consumers grow, service providers aspire to create larger bundles and control points to grow revenue and explore new business models. Cable companies in the US have been forced to adjust their strategies owing to cord-cutting and changing consumer behaviour.

This week, the top-two cable companies in the US, Comcast and Charter Communications, reportedly entered talks with Sprint to create a partnership offering wireless services to their subscribers. The discussions are in the preliminary stages and could have several outcomes. The first scenario, and the more likely one, involves the cable companies negotiating a wholesale deal to use Sprint's network to offer mobile services that could be bundled with their own fixed-line voice, content and Internet services. The other possible outcome would have Charter and Comcast buying Sprint, providing them with the infrastructure, spectrum and talent to scale up their mobile services.

However, Charter and Comcast already have separate deals with Verizon to use its wireless network, which suggests a possible strategic investment in Sprint. Comcast launched its Xfinity Mobile service in May 2017 with a lean portfolio of devices (see Cable and Wireless). The company has a very limited retail operation and therefore relies on online sales to gain mobile users. It has yet to report numbers, but we believe Comcast has seen a limited amount of gross additions, particularly given the lack of device promotions.

Comcast is the market-leading cable provider with more than 28 million subscribers, while Charter has about 26.5 million. They are very well-placed to market new services directly to their existing customers, and are keen to use the mobile business to restore growth and also to lock in subscribers. The more services consumers bundle, the less likely they are to get up and leave. Cable companies face a multidimensional threat with over-the-top content services allowing agnostic access to media and a looming disruption from 5G.

However, as we've noted previously, providers have struggled to sell additional services to existing households and this is highlighted by Comcast's financial results for the first quarter of 2017: the number of new customers signing up to at least three services fell considerably to 18,000, from 109,000 in 1Q16 (see Instant Insight: Comcast Results, 1Q17). Furthermore, there are other services beyond mobile and pay-TV such as the connected home. This is an area where Comcast has seen good initial adoption with more than 1 million subscribers.

It's not unusual for mobile virtual network operators (MVNOs) to lease time on more than one wireless operator's network. TracFone, for example, uses both AT&T and Verizon's networks and Google's Project Fi provides services on top of the networks of Sprint, T-Mobile US and US Cellular. Any talks between Charter, Comcast and Sprint could be seen as complementary to the deal with Verizon, or simply a way of sending a message that there are other options on the market.

Sprint and its parent company Softbank have also been in discussions with T-Mobile US and its parent Deutsche Telekom to merge the two carriers. The move would allow them to build scale to the levels of AT&T and Verizon.

For now the industry is becoming convoluted. Charter and Comcast are looking over their shoulder, concerned about over-the-top service providers as well as new access methods from AT&T and Verizon. Those two, in turn are looking for ways to expand their bundles as mobile threats from MVNOs including cable operators and pricing pressures from T-Mobile and Sprint quickly erode margins.

It's important not to get carried away in market speculation, but it's clear that change is coming. Operators of all sorts are looking for ways to make a new bundle.